Alcatel-Lucent Beats Estimates as Qualcomm to Buy Stake

Alcatel-Lucent SA, under new Chief Executive Officer Michel Combes, beat analysts’ estimates as cost cuts took hold and said Qualcomm Inc. agreed to buy a minority stake. The stock reached a 16-month high in Paris.

The second-quarter operating profit, excluding reorganization and impairment costs, was 24 million euros ($32 million), as sales rose 1.9 percent to 3.61 billion euros, the Paris-based network-equipment maker said today. Analysts had predicted a loss and a revenue decline.

Combes will have to deal with job cuts and asset sales in the coming months to further his reorganization efforts at the company, which has lost more than $10 billion since it was created through a 2006 merger. The 51-year-old Frenchman is in talks with more potential research partners which could, like Qualcomm, become Alcatel shareholders.

“Good progress has been made in the implementation of the turnaround plan,” Combes said on a conference call. “A new organization is in place, we’ve accelerated on cost savings, and the announcement with Qualcomm shows we’re moving ahead with technology partners like we said we would.”

The company is seeking three to five partners to buy a combined stake of a little more than 5 percent, Combes said. He said Qualcomm will invest well below 5 percent as part of a joint research program to develop so-called small-cell base stations for locations such as university campuses and malls.

‘Good’ Earnings

The stock rose 14 percent to close at 1.83 euros in the French capital, the highest price since March 2012, valuing the company at 4.3 billion euros. It has more than doubled since hitting a 23-year low in October.

“The earnings are good,” said Eric Beaudet, an analyst at Natixis Securities in Paris. “Ebit is positive and better than the consensus.”

The operating profit compares with a loss of 85 million euros a year earlier and a loss of 202 million euros in the preceding quarter. Net loss widened to 885 million euros from 396 million euros a year earlier. Alcatel had a 552 million-euro impairment expense and a 194 million-euro restructuring charge. Analysts projected a net loss of 280 million euros on sales of

3.48 billion euros, according to the average of estimates compiled by Bloomberg.

Since the 2006 merger, CEOs have tried to restructure Alcatel by slashing costs and selling assets while the company struggled to compete against Ericsson AB and Huawei Technologies Co. In December, the company pledged its patents and some other assets to get financing.

Cash Burn

In his first statements as CEO, Combes stressed the company doesn’t have much time and has to take drastic measures.

Combes, who took over on April 1 from Ben Verwaayen, has promised positive free cash flow and a tighter focus on the company’s most lucrative businesses once his three-year plan to refocus innovation budgets, cut costs and sell assets is fully executed.

Alcatel consumed 248 million euros in free cash flow in the second quarter. The company in the past six years has used 700 million euros of cash on average every year.

“Alcatel managed a good performance in IP and optics, which translated into sales growth and better than expected gross margin,” said Alexander Peterc, an analyst for Exane BNP Paribas in Paris. “This good news makes up for the poor cash performance. I expect the boost to the shares will continue.”

Plans to sell 1 billion euros of assets and cut costs by another 1 billion euros, detailed on June 19 by Combes, boosted the share price by as much as 7.4 percent that day.

Asian Competition

Combes, a former Vodafone Group Plc executive, has started renegotiating part of Alcatel’s debt and plans to meet with union representatives in the coming weeks to discuss what effect his reorganization may have on the company’s 72,000 workforce.

Alcatel and its European competitors are battling intense competition from Asian players such as Huawei, China’s largest network-gear maker, which has said it will hire more in Europe and is ready to outspend market leader Ericsson in research and development.

Ericsson, the largest maker of wireless-network equipment, on July 18 posted sales that missed estimates as competition with Huawei for contracts to build and service phone systems intensified. Huawei posted an 11 percent gain in first-half sales as a push into mobile devices helped expand its lead in total revenue over Ericsson.

Nokia Oyj this month agreed to buy Siemens AG’s share in their six-year venture Nokia Siemens Networks for 1.7 billion euros.

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